Target-date fund portfolio construction


Portfolio construction 


Target Retirement Fund and Trust

Strategic asset allocation

Our philosophy rests on the evidence that a sound investment strategy starts with an asset mix built on reasonable expectations for risk and return and uses globally diversified market-cap-weighted investments to help avoid exposure to unnecessary risks.

The strategic approach remains a key investment principle underlying Vanguard Target Retirement Funds. It has proven to drive more than 90% of a portfolio’s long-term variability and remains as effective as ever in helping participants seek lifelong financial well-being.

We carefully evaluate asset classes and strategies through a TDF-specific lens and exclude those that add volatility without adequate compensation in return or that fail to meet the criteria below.

  • Investor suitability: for the broadest swath of participants, appropriate as a QDIA and for all industries.
  • Investment value: cost, simplicity, transparency, liquidity.
  • Portfolio construction: improved diversification, enhanced return, reduced risk.
  • Impact on outcomes: materially improve long-term probability of retirement success.

Asset classes


We combine both U.S. and international equity to provide exposure to about 99% of the public market and contain all market caps, investment styles, sectors, and developed and emerging markets, including global real estate. We do have a home bias, and our research has shown that allocations of 30% to 40% to international stocks have provided more than 95% of the benefit of full market-cap diversification.
60 %
U.S. stocks
40 %
international stocks

Fixed income

U.S. bonds

We combine broad exposure to nominal U.S. investment-grade bonds with the safety and liquidity of government and short-duration bonds to provide diversification to the equity exposure.

Why do Vanguard Target Retirement strategies currently exclude high-yield bonds? They represent a small portion of the taxable U.S. bond market, and our research shows that overweighting them compared with the market has increased overall portfolio volatility and downside risk.

International bonds

Unlike most TDFs, we also include an allocation to international investment-grade bonds. This gives our TDF investors exposure to a greater number of securities (7,000 plus), countries (40 plus), yield curves, and economic and inflation environments. Importantly, the factors that drive international bond prices are relatively uncorrelated to those that drive U.S. bond prices.

Our international fixed income assets are hedged back to the U.S. dollar, which minimizes the volatility of global currency fluctuations. Our research has shown that these fluctuations, when unhedged, account for a significant portion of the overall volatility of the asset class. We believe our hedging is critical to maintaining the risk and return properties of the asset class.

70 %
U.S. investment-grade bonds
30 %
hedged international bonds

Inflation protection

As participants approach the drawdown phase, they need more inflation protection without introducing more volatility into their portfolios. Five years before the target retirement year, our TDFs start incorporating short-term Treasury inflation-protected securities (TIPS) at age 60.

Our research shows that short-term TIPS provide a hedge against unexpected inflation without the volatility of other asset classes such as commodities, overweighting REITS, or broader TIPS portfolios with average maturities in the intermediate-term range.

17 %
of the total portfolio at age 72
24 %
of the total fixed income allocation at age 72


While use of these strategies may offer advantages, broadly speaking, they can easily increase costs, introduce complexity, lower transparency, and reduce liquidity.

There is a high hurdle for alternative asset classes because TDFs serve a large and diverse investor population. TDF providers typically have limited information about their investors' risk profiles or preferences, while TDF investors cannot express a personal preference for alternatives. Our methodology is sensitive to these realities.

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Annuities may be a good option for some participants, specifically those retirees whose basic living expenses aren't covered by existing sources of guaranteed income such as Social Security.

When it comes to TDFs, our research consistently comes back with the same conclusion: While annuities can make sense for some participants, they are not appropriate for all participants who are relying on a default solution such as a TDF. We believe choosing an annuity is a personal decision.

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Static tilts

This strategy tilts the portfolio allocation away from market-cap weight. Equity tilts are often made by size, style, sector, or location, and fixed income tilts are frequently based on credit quality, duration, or location.

These tilts may have provided outperformance during certain periods historically, but they tend to be inconsistent throughout a full market cycle, and their long-term effectiveness is uncertain. In fact, most size and style tilts found in TDFs have been small in nature and have had no discernable impact on the long-run probabilities of retirement success.

Active versus passive

We strongly believe in balancing the risks borne by investors with return expectations that appropriately compensate for those risks, all within a solution encompassing the wide range of TDF investors.

While active management does offer the opportunity to outperform the market, we consider the TDF investor base to have a higher risk aversion and, therefore, an implied lack of active risk tolerance. Taking on active manager risk is a decision that investors should make on their own.


In theory, tactically adjusting long-term portfolios, such as TDFs, during periods of market turbulence may seem like a good idea. However, research consistently shows that tactical moves—which amount to market timing—are counterproductive over time.

We believe the most prudent way for TDFs to achieve their long-term objective of allowing investors to retire with some assurance of sufficient lifetime income is to start with an asset mix built on reasonable expectations for risk and return and use diversified investments to help avoid exposure to unnecessary risks. This strategic approach should remove the temptation to make tactical adjustments when markets are roiling.

Disclosures and notes

For more information about Vanguard funds, visit to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

Investments in Target Retirement Trusts and Funds are subject to the risks of their underlying funds. The year in the trust or fund name refers to the approximate year (the target date) when an investor in the trust or fund would retire and leave the workforce. The trust or fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The Income Trust/Fund and the Income and Growth Trust have fixed investment allocations and are designed for investors who are already retired. An investment in a Target Retirement Trust or Fund is not guaranteed at any time, including on or after the target date.

Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.